Six months ago, Canopy Growth (NYSE:CGC) was firing on all cylinders, dominating the global cannabis market, which appeared to be in the first inning of a promising long-term growth narrative that would power Canopy’s revenues and profits materially higher for years to come. As a result, CGC stock was trading hands north of $50, an all-time-high price tag, and up more than 80% on the year.
Then, the struggles started. Against an increasingly uncertain and shaky cannabis macro-backdrop, Canopy’s growth trajectory shockingly decelerated. Margins took a big hit.
The company’s massive investor, Constellation Brands (NYSE:STZ), wasn’t too pleased. They pushed out the CEO and named their own man (Constellation CFO David Klein) as the Chairman of the Board. Investors were spooked by all the operational and executive noise. CGC stock tanked.
Today, CGC trades hands narrowly above $20, a near two-year-low, and down about 60% off those earlier 2019 highs.
But, if you take a step back and look at the big picture, you’ll see that not much has really changed for Canopy Growth. This is still the world’s leading cannabis company, in a cannabis market that is still rapidly growing, with the multi-billion dollar backing of a global alcoholic beverage giant with deep pockets, making tons of aggressive moves to lay the foundation for big growth in the long term.
Sure, things at Canopy got really messy over the past few months. But, things will get cleaner over the next few quarters. As they do, the good things about CGC will start to shine through again. Once they do, Canopy Growth stock will stage a huge comeback.
Canopy Growth Has Been Messy
There’s no other way to put it. Things at Canopy Growth have been an absolute mess over the past few months.
Some of this mess isn’t Canopy’s fault. Due to regulatory and legislative matters moving at a snail’s pace, the pace of cannabis store openings in Canada has been much slower-than-expected.
This has led to constrained supply in the legal market, versus relatively less constrained supply in the black market, so demand has largely remained in the black market because legal market prices are higher.
Also, there has been a delay in government approval of cannabis derivative products, as well as tremendous regulatory uncertainty with respect to everything cannabis-related, so the entire market projects to keep moving forward at a snail’s pace.
Against this slowing growth backdrop, Canopy has taken a few missteps, the sum of which has caused Canopy’s revenue growth rates to decelerate meaningfully and margins to retreat in a big way. Importantly, Canopy’s lead over other cannabis players has narrowed over the past few quarters.
Constellation Brands, who pumped $4 billion into Canopy, wasn’t too impressed with Canopy losing its lead. They pushed out the company’s CEO, and put their own CFO in charge of the board.
In sum, Canopy has been a mess over the past few months, defined by regulatory uncertainties, slowing growth, overspending, and executive turnover. Against that backdrop, CGC stock tanked.
Things Are About to Get Cleaner
The bull thesis on CGC is centered around two big ideas. First, things will get cleaner at Canopy Growth over the next few months. Second, as they do, Canopy’s favorable long-term fundamentals will shine once again, and this will power a big rebound in CGC stock.
Everyone always says to see the forest through the trees. But, it’s really hard to see a beautiful, green forest through the trees when the first line of trees in the forest is a bunch of rotten, dead trees.
The narrative has been clouded by a bunch of rotten, dead trees over the past few months. Slowing growth. Falling margins. Executive turnover. With all those rotten, dead trees right in plain sight, investors were left unable to take a step back and see the green trees behind all the rotten ones.
Those rotten trees have now largely been knocked down. There’s a new CEO, a new Chairman, and a new growth strategy centered around making various acquisitions and laying the groundwork for global expansion. Thus, over the next few months, the dead trees which dominated investors’ horizons for the past few months, will go away, and be replaced by more lively trees.
This will enable investors to more effectively see the forest through the trees. They will once again look favorably upon Canopy’s strong competitive positioning in a secular growth cannabis market with tons of potential in the long run. As they do that, CGC stock will bounce back.
Bottom Line on CGC Stock
CGC stock has been a big loser for the past six months. But, the stock is showing support at $20, and with good reason — the optics surrounding this stock are finally starting to improve in a meaningful way.
As the optics continue to improve, investors will adopt increasingly optimistic attitudes on the company’s long-term fundamental growth prospects. When they do that, CGC stock will reverse course and charge higher.
As of this writing, Luke Lango was long CGC.